CAIB 3 - Chapter 5 - Surety Bonds Questions and Answers 100% Pass

CAIB 3 - Chapter 5 - Surety Bonds Questions and Answers 100% Pass What guarantees are provided by various licence and permit bonds? 1. Compliance Guarantees 2. Financial Guarantees 3. Credit Guarantees Surety -The state of being sure, certain and secure. -"one who undertakes to pay money or to do any other act in event that his (the) principal fails therein." -Promises to answer for the default of the principal. Suretyship A guarantee of performance made by one person or entity for another. It's basic function is to eliminate risk to the person to whom the promise of performance is made. Personal Suretyship A guarantee from family or friends to a third party of promise to fulfil some obligation. This practice of going bond or guaranteeing the performance of another marked the beginnings of suretyship. What are the two main classes of bonds issued by early corporate surety companies? 1. Fidelity Bonds 2. Surety Bonds Fidelity Bonds Ensures protection for the dishonest acts of employees. Surety Bonds An undertaking by one party (the surety) to become accountable to another party (the oblige) for the performance of an obligation or undertaking by a third party (the principal). It is a promise to provide credit, if and when needed, to ensure the faithful performance of the obligation. What are the 3 C's of qualifying for a surety bond? 1. Character - ensure that the principal is of good character, pays bills promptly, and is of good business reputation. 2. Capacity - Assessment of the principal's ability as based on past history. The surety needs to be satisfied that the principal has the knowledge, experience, and labour pool necessary to do the job. 3. Capital - The financial capability of the principal to complete the work on hand, in addition to the project for which bonding is requested. Characteristics of Surety Bonds 1. Three party contract. 2. Principal liable to surety. 3. No losses expected. 4. Of indeterminate length and non-cancellable. 5. Statutory or non-statutory in form. 6. Bond limit (penalty). 7. Bond Premium. 8. Written Contract. Define Principal -"the person primarily liable". -Includes all persons who have undertaken the obligation to perform the promise stated in the contract. Define Obligee -"the party to whom someone else is obligated under a contract". -The party to whom the bond is given.